Countdown August 2009 1

CountdownDeloitte Canada’s IFRS transition newsletter

August 2009

Welcome to the August 2009 edition of Countdown!

As the summer months come to an end, our readers continue to be focused on their International Financial Reporting Standards (IFRS) transition efforts. We hope everyone has had a chance to take some well-earned vacation

time and recharge their batteries for what we are expecting will be a busy fall period!

Fair values are a prominent theme in many of the IFRSs being implemented and this month’s lead article by Karen Higgins addresses just that. The Lightyear implementation team conti-nues to forge ahead with their implementation by considering Investment Property – what it is, how to account for it, and what disclosures are required.

As always, we want to continue to understand your concerns and meet your needs, so please submit ideas regarding matters that you would like to see us address in Countdown to deloitteifrs@deloitte.ca.

In addition, don’t forget to complete our IFRS transition survey in order to enable us to benchmark progress and make comparisons regarding IFRS choices made by entities across Canada.

See you again in September!

Don Newell National Leader - IFRS services

Table of contents How Fair is Fair Value? 1

The Real Deal 3

CSA Staff Notice 33-314 6

Deloitte IFRS publications and events 7

International Round-up 8

Contact information 9

Visit us at www.DeloitteIFRS.ca

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.

© Deloitte & Touche LLP and affiliated entities. Countdown August 2009 1

How Fair is Fair Value?By Karen Higgins

Without a crystal ball, fair value is an estimate, subject to measurement uncertainty

Fair value is a basic under-pinning of many accoun-ting standards. It is used as the basis for recognition of most transactions, the

ongoing measurement of certain balances and it is often used as a basis for evaluating the need for an impairment provision or write-down and the amount thereof. Fair value is not a new concept in the financial reporting world - its use in current Canadian GAAP has becoming increasingly prevalent in recent years. However, the recent slew of credit crisis related projects and a typically more prominent usage of fair values under IFRSs, including in the opening balance sheet, warrants a fresh look at fair values, what they are intended to represent and the inherent measurement uncertainty implicit in these values and the effective mitigation thereof.

Fair value in International Financial Reporting Standards (IFRSs) is intended to represent the best estimate of what independent, arms-length third parties would negotiate when buying an asset or agreeing to assume a liability. IFRS 1 – First-time Adoption of IFRSs provides the following defini-tion of fair value, a definition which is replicated elsewhere in other IFRSs:

The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction

In terms of translating this into a figure that is reported or disclosed in the financial statements, there is generally a great deal of guidance and best practices available in the marketplace which, in turn, enables companies to estimate fair value reliably and on a basis consistent with other market participants. A rigorous process, well supported assumptions and a comprehensive understanding of all of the key features of the item or transaction are essential to the determination of a reliable fair value. However,

without a crystal ball, fair value will always be an estimate subject to measurement uncertainty until there is an actual transaction with an arms-length third party confirming the stated value. Until the actual transaction occurs, it may be difficult to quan-tify how much measurement uncertainty there is in the fair value calculation – is the range 5%, 15% or 50% above or below the recorded amount?

Notwithstanding the inherent uncertainties in the measurement process, fair value is believed by the International Accounting Standards Board (IASB) to be a more relevant number than historical cost in many circumstances and where fair value measu-rement or disclosures are required by IFRSs, it is because fair value is believed to provide investors with relevant and timely information about the future cash inflows and outflows of the company.

The role of fair value in the credit crisis – the verdict is in!

One of the areas where the use of fair values has the broadest applications is financial instruments. This is also the area where the complexities associated with fair value measurement are often the most signifi-cant. Politicians, standards setters, bankers, investors and accountants all have a view on whether fair value caused or contributed to the credit crisis. After extensive studies, the overall conclusion from most of the interested parties was that fair value did not cause the credit crisis but certain elements of finan-cial instrument fair value accounting may have been one contributing factor – especially the impairment guidance for financial instruments. Specifically, the Securities and Exchange Commission completed an extensive study and reported the following to Congress in December of 2008:

“While the Staff does not recommend a suspension of existing fair value standards, additional measures should be taken to improve the application and prac-tice related to existing fair value requirements”.

The recommendations of most task forces, political groups and special interest groups were similar in that they did not suggest that fair value be elimi-nated but rather that more guidance be provided to aid in the consistent application of fair value concepts.

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The future of fair value accounting

As a result, the IASB is actively working on simpli-fying their financial instrument standards, inclu-ding the impairment model and they are debating whether it remains appropriate to incorporate non-performance (credit) risk in the measurement of financial liabilities, asset retirement obligations, employee benefit obligations and other balances. However, don’t mistake simplification for elimination of fair value! The IASB’s current financial instrument Classification and Measurement proposals issued in July 2009 continue to incorporate a fair value through earnings classification alternative as one of the two main classification choices.

Fair value measurement, and the simplification thereof in the future, is not just a financial instru-ment concept. Many companies struggle with the fair value concepts embedded in other standards. The determination of impairment charges for good-will, intangible assets, and other long lived assets are all dependent on fair value-based measurements. Under IFRS, non-financial assets are generally written down to recoverable amount which is the greater of fair value less costs to sell or value in use. Fair value is often difficult to estimate for non-financial assets because these assets may be specialized in nature or company-specific and therefore, there is no “plain vanilla” model or approach for valuing these assets. Rather, the exercise of judgment is required along with the required knowledge and expertise to consis-tently determine and apply reasonable assumptions and inputs to a fair value model appropriate for the item under review. Disclosure, of course, should not be overlooked as IFRSs build this reporting mecha-nism in so that users have full knowledge of how values have been determined and any measurement uncertainty implicit in these values.

In order to enhance the consistency of application of fair value concepts within IFRS, the IASB issued an exposure draft in May 2009 which is designed to provide a single definition of fair value for all IFRSs which incorporate a fair value concept. Although consistent guidance and criteria for the determina-tion of fair value will be helpful and may eliminate certain inconsistencies between IFRS standards today, fair value will remain one of the most signifi-cant aspects of measurement uncertainty for finan-cial statement preparers.

What does this mean as we move towards IFRS changeover in Canada?

Here are a few suggestions to help you tackle the

fair value challenges as part of your overall IFRS transition:

Read and understand the literature and supporting •

interpretive guidance;

Inventory all balances, transactions and disclosures •

which include fair value calculations and ensure your organization has a consistent set of policies and procedures which govern the fair value calcu-lations for all amounts;

Where there is a choice, on transition to IFRSs, •

evaluate the implications of using a fair value model on transition and ensure you have the processes in place to report regularly and reliably on this basis;

Monitor the accounting standard setting process •

and ensure you are considering the impact of new or proposed guidance into your fair value models;

Build in sensitivity analysis and stress testing •

into your fair value models to understand how much measurement uncertainty is inherent in the models;

Challenge your assumptions to ensure that all •

assumptions are appropriately updated, reflect current market conditions and are well supported by supporting documentation;

Consider the options available to fair value items •

under an IFRS 1 exemption – in some instances, a fair value option is available which may alleviate the effort associated with retrospective application but will, nonetheless, require a robust and reliable process in itself;

Automate fair value calculations whenever possible •

to reduce the risk of error; and,

Start early, obtain independent assistance when •

necessary, and ensure there is sufficient time for internal and external reviews before the deadline.

As stated at the start of this article, fair value is not a new concept. In applying fair value measurements and disclosures, users have access to more timely, complete and relevant information but inevitably this brings with it some measurement uncertainty. The benefits of reporting fair values will indeed provide a “fair” picture of an entity’s position and its performance if the process in place to determine fair values incorporates a solid understanding of the item in question, consistently applies reasonable assumptions and judgment and, using plain English terms, discloses, to the user, any risks inherent in this process and what this could mean for the financial statements.

© Deloitte & Touche LLP and affiliated entities. Countdown August 2009 3

The Real DealInvestment Property

Lightyear has diversified operations and a significant portfolio of property, plant and equipment (PPE). Earlier in 2009, Lightyear’s analysis of IAS 16 – Property, Plant and Equipment – was considered. Lightyear is now focusing on some of the specific attributes of its property portfolio to assess the extent to which other aspects of IFRS may need to be considered and, in particular, IAS 40 – Investment Property.

Although Lightyear’s primary business activities do not revolve around either the sale or rental to others of properties, the implementation team is aware that the requirements of this standard may be significant, when applicable. In addition, while the requirements of IAS 40 may have the most significant impact in specific sectors (e.g. real estate), the requirements do not limit the scope of IAS 40 to specific industries and the guidance needs to be considered by every publicly accountable enterprise (PAE), Lightyear included, on a property by property basis.

What’s the Deal?

IAS 40 is required to be applied to all property that meets the definition of “investment property” – essentially, property that is held for capital appreciation or for rental to other parties as opposed to for the production or supply of goods or services. A simple example would be a building that is purchased and subsequently wholly rented out to other parties in order to generate rental income (investment property), as opposed to, for example, a manufacturing plant (owner-occupied property). Owner-occupied property falls within the scope of IAS 16 – effectively, measure using the cost or revaluation model and depreciate into income over the useful life of the property. Investment property, as defined by IAS 40, may be accounted for using either:

© Deloitte & Touche LLP and affiliated entities. Countdown August 2009 4

Keeping it Real

Is the Property “Owner-Occupied” or “Investment” Property?

As with all PAEs, Lightyear needs to review its portfolio, assess the facts pertaining to each property and make a determination as to which, if any, of its properties fall within the scope of IAS 40. If it has invest-ment property, the next step will then be deciding on the policy for the investment property. A single policy choice must be selected for all investment property – no cherry picking here –and the standard is clear that once the fair value model is chosen it will be difficult to demonstrate that a subsequent change to the cost model is a more meaningful basis. Careful analysis is required.

DescriptionIs it occupied by, and used by, Lightyear?

Is it held for capital appreciation or to earn rentals?

Classification

Parcel of land in Calgary purchased three years ago and which is expected to be sold in the next five to ten years depending on the property market performance.

No – the land is not in use by Lightyear.

Yes – although there is no current plan to sell the land it is effectively being held until the time to sell the land is right and capital appreciation is maximized.

Investment Property

Note – as plans to sell the property solidify post-transition, Lightyear will also need to address any implications of IFRS 5 – Assets held for Sale and Discontinued Operations.

Land and building in Halifax for which Lightyear currently has no fixed plans. The company has not yet decided whether it will be used for its own operations or if manage-ment will be selling it in the short or long term.

Not at present. It is not being rented out. Absent any rental of the property to other parties or use of the property to support the operations of Lightyear, by default this is considered to be held for capital appreciation.

Investment Property

(IAS 40.08(b) states that where the future use is currently undetermined, it is regarded by default to being held for capital appreciation).

Corporate office building in Montreal.

Yes – used solely to support the operations of Lightyear.

No. Owner-Occupied Property that should be accounted for under IAS 16.

Land and building in Toronto. Lightyear occu-pies and uses three of the ten floors; the rest are leased out to third parties.

Yes – a portion of the building is currently being used to support the opera-tions of Lightyear.

Yes – a portion is being used for the purposes of rental income from third parties.

Analysis required!

The building is partially owner occupied and partially investment property.

The two parts are accounted for separa-tely if able to be sold separately or leased out under a finance lease. Otherwise, the property can be accounted for as investment property only if an insignificant portion is held for use in the produc-tion and sale of goods or services or for administra-tive purposes.

© Deloitte & Touche LLP and affiliated entities. Countdown August 2009 5

Policy Choice – Cost Model or Fair Value Model

Lightyear must now choose either the fair value or depreciated cost model to apply to both of the invest-ment properties. This decision will need to be made both to determine the extent of any required adjust-ments to the opening IFRS statement of financial posi-tion at the date of transition, similar to the considera-tions made for property, plant and equipment earlier in the year, to IFRSs as well as for the post-transition policy that Lightyear will be applying under IFRS.

Some of the IAS 40-related items being considered by Lightyear’s implementation team are listed below:

Depreciated cost Fair value

Likelihood of more frequent impairment charges as impairment test under IFRS is based on discounted cash flows (as compared to undis-counted cash flows under current Canadian gene-rally accepted accounting principles (GAAP)).

Very difficult to support a change to depreciated cost once this model is selected.

Because previous impair-ment charges can be reversed, increased risk of both upward and downward fluctuations in net income.

Need to gather this infor-mation for disclosure purposes, regardless of model selected.

Will likely end up with the same net income as under Canadian GAAP (excluding impacts of impairment charges/reversals as discussed above).

Long-term hold positions and income volatility from fluctuations in fair values seem to contradict investor needs.

Whether or not fair value measurement is adopted, the requirement to disclose fair value infor-mation applies regardless.

Removes the requirement to depreciate the asset (including requirements for depreciating at the significant part level).

Most international real estate companies have gone the fair value route (however, in the UK and Australia, the fair value model was already part of their previous financial reporting regimes).

Disclosures

As noted above, regardless of the model chosen, Lightyear will be still be required to make several general disclosures under IAS 40. Some of the disclo-sure requirements are included in the table below. Clearly, the disclosure requi-rements are substantive and Lightyear and its IFRS team are working to ensure there is a mechanism in place to collect this data from transition onwards.

Required disclosures

Whether the company has chosen to apply the fair value or the cost model.

Whether and under what circumstances, properties held under operating leases are classified as investment property when the fair value model is used.

Criteria used to distinguish investment property from owner-occupied property or property held for sale in the normal course of business (when that classifica-tion is difficult).

Methods and significant assumptions applied in determining the fair value of investment property, including a statement of whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which are disclosed because of the nature of the property and lack of comparable market data).

Extent to which fair value of investment property is based on a valuation by an independent valuator (who holds a recognized and relevant professional qualifi-cation and has recent experience in the location and category of property being valued).

If, however, there has been no such valuation, that fact should be disclosed.

Amounts recognized in profit or loss for investment property:

Rental income •

Direct operating expenses (from investment property that generated rental •

income during the period)

Direct operating expenses (arising from investment property that did not •

generate rental income during the period)

Existence and amounts of restrictions on the investment property or remittance of income and proceeds of disposal.

Contractual obligations to purchase, construct or develop investment property or for repairs and maintenance or enhancements.

Next Steps: Based on careful consideration by Lightyear’s IFRS implementation team the company has preliminarily concluded to apply the fair value model to its investment properties, but will be looking at the impact on their covenants and discussing this proposed choice in detail with its auditors and audit committee prior to making its final decision. Due to the more complicated nature of the tax effects and other legal matters, Lightyear will continue with their analysis of this with the help of their tax advisors and legal counsel.

See you again next month for yet another step forward in Lightyear’s IFRS implementation!!

© Deloitte & Touche LLP and affiliated entities. Countdown August 2009 6

CSA Staff Notice 33-314 Non-self Regulatory Organizations

On July 10, 2009, the Canadian Securities Administrators (CSA staff) issued CSA Staff Notice 33-314 International Financial Reporting Standards and Registrants which proposes that all non-self regulatory organizations (non-SRO) registrants will be required to use IFRS for financial years beginning on or after January 1, 2011. CSA staff has proposed this requirement will apply regardless of whether the non-SRO registrant fits the definition of publicly accountable enterprise set by the Canadian Accounting Standards Board (“AcSB”).

Non-SRO registrants include investment counsel and portfolio managers, limited market dealers, exchange-contracts dealers, scholarship plan dealers, restricted dealers and, in Québec, mutual fund dealers. Proposed National Instrument 31-103 Registration Requirements and Exemptions and Consequential Amendments to Related Instruments (NI 31-103) contemplates new registration categories, including exempt market dealers and investment fund managers. The CSA staff has proposed that the requirement to adopt IFRS will also apply to the new registration categories set out in proposed NI 31-103, if those new categories are adopted.

Those registrants that are members of a self regulatory organization, such as the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) will receive notice separately from the MFDA and IIROC on the requirements for the use of IFRS.

A mutual fund dealer that operates in Québec and one or more other jurisdictions in Canada is required to be a member of the MFDA under the securities legislation of the other jurisdictions.

The Autorité des marchés financiers will provide guidance to mutual fund dealers opera-ting in Québec on the applicability of IFRS separately.

Registrants with financial years ending December 31 will be required to prepare their working capital calculations on a basis consistent with IFRS beginning on January 1, 2011. Also, issuers should consider the guidance in CSA Staff Notice 52-320 Disclosure of Expected Changes in Accounting Policies Relating to Changeover to International Financial Reporting Standards in developing their changeover plan.

© Deloitte & Touche LLP and affiliated entities. Countdown August 2009 7

Deloitte IFRS publications and eventsA comprehensive summary of Deloitte IFRS publications and events is available here.

Please first login, first time visitors will need to complete a short registration form. Below we have included new publications and events most rele-vant to Canadian companies.

IFRS Publications

The road to a cost-effective conversion maximizing the return on your IFRS investment – Volume III in Deloitte’s service on conversion to IFRS. Click here to access the publication.

St. John’s Newfoundland

September 20-23, 2009:

Canadian Insurance Accountants Association – Annual Conference. For more information please click here.

Halifax, Nova Scotia

September 23, 2009:

IFRS, Public Sector Accounting, Private Company GAAP, Not-for-Profit GAAP: Which one applies to you? To be invited to this breakfast session please email dsymonds@deloitte.ca no later than September 4th.

Toronto

September 16-18, 2009:

CICA – Financial Reporting and Accounting Conference. For more information please click here.

November 17-18, 2009:

INFONEX – IFRS for Real Estate – understanding critical issues affecting financial reporting in the real estate industry. For more information please click here.

Calgary

September 15-16, 2009 (two-day workshop):

IFRS for the Canadian Oil and Gas Sectors. For more information please click here.

September 22-23, 2009

Infonex – Internal Controls Calgary 2009. For more information please click here.

© Deloitte & Touche LLP and affiliated entities. Countdown August 2009 8

International Round-up Updates and news from the IASB

August 7, 2009: IFRIC proposal on debt extinguishments

The International Financial Reporting Interpretations Committee (IFRIC) has published a draft Interpretation, IFRIC D25 Extinguishing Financial Liabilities with Equity Instruments. The proposal addresses the appropriate accounting under IFRSs when a creditor agrees to accept an entity’s shares or other equity instruments to settle the financial liability fully or partially. Comments on the proposal are due by October 5, 2009. Click here for further details.

August 7, 2009: IASB exposure draft on classifications of rights issues

The IASB has invited comment on an exposure draft (ED) of an amendment to IAS 32 Financial Instruments: Presentation on the classification of rights issues. The proposals seek to clarify the accounting treatment when rights issues are deno-minated in a currency other than the functional currency of the issuer. Current practice appears to require such issues to be accounted for as derivative liabilities. The proposals state that if such rights are issued pro rata to an entity’s exis-ting shareholders for a fixed amount of currency, they should be classified as equity regardless of the currency in which the exercise price is deno-minated. The ED Classification of Rights Issues is open for comment until September 7, 2009. Click here for further details.

August 21, 2009: IASB’s exposure draft on employee benefits discount rate

The IASB has published for public comment propo-sals to amend the discount rate for measuring employee benefits. IAS 19 Employee Benefits currently requires an entity to determine the rate used to discount employee benefits with reference to market yields on high quality corporate bonds. However, when there is no deep market in corpo-rate bonds, an entity is required to use market yields on government bonds instead. The exposure draft proposes to eliminate the requirement to use yields on government bonds. Instead, entities would estimate the yield on high quality corporate bonds. Comments are due by 30 September 2009. Click here for further details.

National

Don Newell 416-601-6189 dnewell@deloitte.ca

Robert Lefrançois 514-393-7086 rlefrancois@deloitte.ca

Karen Higgins 416-601-6238 khiggins@deloitte.ca

Clair Grindley 416-601-6034 clgrindley@deloitte.ca

Bryan Pinney 403-503-1401 bpinney@deloitte.ca

Delna Madon 416-874-4330 dmadon@deloitte.ca

Anshu Grover 416-775-7317 ansgrover@deloitte.ca

Peter Chant 416-874-3650 pchant@deloitte.ca

Atlantic

André Vincent 902-721-5504 avincent@deloitte.ca

Jacklyn Mercer 902-721-5505 jamercer@deloitte.ca

Jonathan Calabrese 506-663-6614 jcalabrese@deloitte.ca

Québec

Nathalie Tessier 514-393-7871 ntessier@deloitte.ca

Marc Beaulieu 514-393-6509 mabeaulieu@deloitte.ca

Richard Simard 418-624-5364 risimard@deloitte.ca

Maryse Vendette 514-393-5163 mvendette@deloitte.ca

Ontario

Tony Ciciretto 416-601-6347 tciciretto@deloitte.ca

Kerry Danyluk 416-775-7183 kdanyluk@deloitte.ca

Steve Lawrenson 519-650-7729 slawrenson@deloitte.ca

Lynn Pratt 613-751-5344 lypratt@deloitte.ca

Éric Girard 613-751-5423 egirard@deloitte.ca

John E. Hughes 416-874-3519 Johnehughes@deloitte.ca

Manitoba

Susan McLean 204-944-3547 sumclean@deloitte.ca

Richard Olfert 204-944-3637 rolfert@deloitte.ca

Saskatchewan

Cathy Warner 306-565-5230 cwarner@deloitte.ca

Andrew Coutts 306-343-4466 ancoutts@deloitte.ca

Alberta

Steen Skorstengaard 403-503-1351 sskorstengaard@deloitte.ca

Anna Roux 403-503-1421 aroux@deloitte.ca

Paul Borrett 780-421-3655 paborrett@deloitte.ca

British Columbia

Dan Rollins 604-640-3212 drollins@deloitte.ca

Tim Holwill 604-640-3009 tiholwill@deloitte.ca

Libby Owlett 604-640-4958 eowlett@deloitte.ca

Contact information

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